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Interdependent Expectations and the Spread of Currency Crises Wolfram Berger and Helmut Wagner Full Text of this Article (PDF 97K) Abstract: In this paper we
analyze how the mutual interdependence of private sector expectations
influences the stability of fixed exchange rate regimes in different countries.
When countries trade with one another, the crisis probabilities are interdependent
because monetary policy in each country affects welfare both at home and
abroad. Wage setters react to a trading partner’s imminent crisis,
because a loss of international competitiveness changes their governments’
optimal escape clauses. Thus, not only actual devaluations but an increasing
crisis probability in one country may trigger currency crises elsewhere.
We show that both fundamental weakness and spontaneous shifts in market
sentiment may play a role in the transmission of currency crises. |
